Hiring Math
What a hire really costs and how much new business has to pay for it.
Pen and paper is fine · no calculator needed why?
Opens at level 33. You're level 1. You can read and practice here now.
the idea
A hire costs more than the paycheck. Payroll-related costs add an assumed percent on top of wages, and tools and training add more.
To pay for a hire, new customers must bring in enough contribution, not revenue, since serving each one has its own variable costs. People are also paid for more hours than they can bill, so the billable hours have to carry the rate.
A business whose owner works unpaid is less profitable than it looks. Charge a fair cost for that work to see the real picture.
techniques
The full cost of a hire
- Multiply the wage by 1 plus the payroll share: × 1.2 for 20%.
- Add the monthly extras, like tools.
worked example
A new hire's wage is $3,000 a month. Assume payroll-related costs add 25% on top of wages, plus $200 a month for tools. What is the monthly cost of the hire?
- $3,000 × 1.25 = $3,750.
- $3,750 + $200 = $3,950.
Answer: $3,950
Customers to cover a hire
- Divide the hire's monthly cost by the contribution per customer, not the price.
- Round up to whole customers.
- This assumes the demand and the capacity are there.
worked example
A hire adds $3,950 of monthly cost. Each additional customer pays $400 a month and contributes $150 before that cost. How many additional whole customers are needed to cover the hire?
- Use the $150 contribution, not the $400 price.
- $3,950 ÷ $150 ≈ 26.33, so round up to 27.
Answer: 27
Rate for the billable hours
- Billable hours: paid hours × the billable share.
- Divide the revenue target by the billable hours, not all paid hours.
worked example
A technician is paid for 160 hours a month, but only 60% of those hours can be billed. To bring in $7,680 a month, what hourly rate must the billable hours carry?
- 160 × 0.6 = 96 billable hours.
- $7,680 ÷ 96 = $80.
Answer: $80
watch out for
- Using the wage alone. An employee costs more than the paycheck.
- Dividing a hire's cost by the customer's price. Each customer's variable costs come out first, so use contribution.
- Dividing the revenue target by all paid hours, as if every hour could be billed.
- Counting the owner's cash withdrawals as the cost of their work. Withdrawals are distributions, not wages or expenses.
practice
Customers to cover a hire
worked example
A hire adds $9,200 of monthly cost. Each additional customer contributes $310 a month before that cost. How many additional whole customers are needed to cover the hire?
Answer: 30
- $9,200 ÷ $310 ≈ 29.68; round up to 30 customers, assuming there's capacity and demand for them.
The real monthly cost of a hire
worked example
A new hire's wage is $6,600 a month. Assume payroll-related costs add 15% on top of wages, plus $300 a month for tools. What is the monthly cost of the hire?
Answer: $7,890.00
- Wage × (1 + 0.15) + tools = $6,600 × 1.15 + $300 = $7,590 + $300 = $7,890.
Rate needed with non-billable time
worked example
A technician is paid for 160 hours a month, but only 80% of those hours can be billed. To bring in $7,680 a month, what hourly rate must the billable hours carry?
Answer: $60.00
- Billable hours = 160 × 0.8 = 128; rate = $7,680 ÷ 128 = $60.
Profit after paying the owner fairly
worked example
Reported monthly profit is $2,500, but replacing the owner's unpaid work would cost $2,000 a month. What profit remains in this adjusted view?
Answer: $500.00
- Adjusted profit = reported profit − fair cost of the owner's work = $2,500 − $2,000 = $500.
- This is a management view; it doesn't rewrite the books.